Regionalization
vs.
Globalization
Hideaki Hirata, M. Ayhan Kose and Christopher Otrok
WP/13/19
© 2013 International Monetary Fund WP/13/
IMF Working Paper
Research Department
Regionalization
vs.
Globalization Prepared by Hideaki Hirata, M. Ayhan Kose and Christopher Otrok
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Authorized for distribution by Stijn Claessens January 2013
Abstract:
Both global and regional economic linkages have strengthened substantially over the ast quarter century. We employ a dynamic factor model to analyze the implications of these inkages for the evolution of global and regional business cycles. Our model allows us to assess he roles played by the global, regional, and country-specific factors in explaining business cycles in a large sample of countries and regions over the period 1960–2010. We find that, since the mid-1980s, the importance of regional factors has increased markedly in explaining usiness cycles especially in regions that experienced a sharp growth in intra-regional trade and financial flows. By contrast, the relative importance of the global factor has declined over the same period. In short, the recent era of globalization has witnessed the emergence of regional usiness cycles. JEL Classification Numbers:C11, C32, E32, F41, F42 Keywords: Business cycles; Comovement; Synchronization; Trade linkages; Financial linkages Author’s E-Mail Address: h-hirata@hosei.ac.jp; akose@imf.org; otrokc@missouri.edu
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Hirata: Faculty of Business Administration, Hosei University and Japan Center for Economic Research; Kose: Research Department, International Monetary Fund; Otrok: Department of Economics, University of Missouri-Columbia and Federal Reserve Bank of St Louis. Earlier versions of this paper were presented at the Federal Reserve Bank of St Louis Conference on “Challenges in Open-Economy Macroeconomics after the Financial Crisis,” the CESIFO Venice Summer Institute on “Global Interdependence, Decoupling and Recoupling,” the CEPR-RIETI Conference on "International Finance and Corporate Finance: Japanese and European Perspectives," the Spring Meetings of the Japan Economic Association, and seminars at the Bank of Japan, the Canon Institute for Global Studies, the Federal Reserve Bank of San Francisco, and UC-Berkeley. We would like to thank our discussants (Sebnem Kalemli-Ozcan, Claudia M. Buch, John Driffill, and Yosuke Takeda), Stijn Claessens, Massimiliano Marcellino, numerous colleagues,
and seminar and conference participants for their useful comments. Ezgi O. Ozturk provided excellent research assistance. Hirata has received financial support for this project under the Japan Society for the Promotion of Science Grant-in-Aid for Young Scientists (B) 24730253. The views expressed in this paper are those of the authors and do not necessarily represent views and policies of the IMF or Federal Reserve Bank of St Louis.
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
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Contents Page
Executive Summary ....................................................................................................................... 4 I. Introduction ................................................................................................................................ 6 II. What Do We Know about the Evolution of Global and Regional Business Cycles? ............... 8 III. Database and Methodology.................................................................................................... 12
A. Database .............................................................................................................................. 12
B. Econometric Model ............................................................................................................. 13
C. Variance Decompositions ................................................................................................... 15 IV. How Important Are Regional Cycles (1960–2010)? ............................................................. 16
A. Global and Regional Cycles ................................................................................................ 16
B. Country-Specific Cycles ..................................................................................................... 17
C. Global, Regional, and Country Factors ............................................................................... 18 V. Business Cycles: Regionalization or Globalization? (1960–84 and 1985–2010) ................... 19
A. Evolution of Global and Regional Cycles ........................................................................... 20
B. Synchronization of Cycles in Consumption and Investment .............................................. 23 VI. Sensitivity Experiments ......................................................................................................... 25
A. Country-Specific Results .................................................................................................... 25
B. Demarcation of Time and Configuration of Regions .......................................................... 26
C. Crises and Synchronization ................................................................................................. 26
D. Dynamics of the Global Factor ........................................................................................... 27 VII. Conclusion ............................................................................................................................ 27 References .................................................................................................................................... 29 Tables 1. Variance Decompositions (1960–2010) ............................................................................. 39 2. Variance Decompositions (1960–84) ................................................................................. 40 3. Variance Decompositions (1985–2010) ............................................................................. 41 4. Variance Decompositions for the World (Different Breaks) .............................................. 42 5. Variance Decompositions for the World (Different End Years) ........................................ 43